Tag Archives: Buffett

How to Read and Get SMARTER

Go Straight

Ask to be on his email list for incredibly insightful articles. dahhuilaudavid@gmail.com
The Buffett Formula — How To Get Smarter from http://www.farnamstreetblog.com/ 

“The best thing a human being can do is to help another human being know more.”
— Charlie Munger

“Go to bed smarter than when you woke up.”
— Charlie Munger

Most people go though life not really getting any smarter. Why? They simply won’t do the work required.

It’s easy to come home, sit on the couch, watch TV and zone out until bed time rolls around. But that’s not really going to help you get smarter.

Sure you can go into the office the next day and discuss the details of last night’s episode of Mad Men or Game of Thrones. Sure you know what happened on Survivor. But that’s not knowledge accumulation, it’s a mind-numbing sedative.

You can acquire knowledge if you want it.

In fact there is a simple formula, which if followed is almost certain to make you smarter over time. Simple but not easy.

It involves a lot of hard work.

We’ll call it the Buffett formula, named after Warren Buffett and his longtime business partner at Berkshire Hathaway, Charlie Munger. These two are an extraordinary combination of minds. They are also learning machines.

Read more every day here: http://www.farnamstreetblog.com/

 

Commenting on what it means to have knowledge, in How To Read A Book, (PLEASE follow that link!) Mortimer Adler writes: “The person who says he knows what he thinks but cannot express it usually does not know what he thinks.”

Can you explain what you know to someone else? Try it. Pick an idea you think you have a grasp of and write it out on a sheet of paper as if you were explaining it to someone else. (see The Feynman Technique and here, if you want to improve retention.)

Nature or Nurture?

Another way to get smarter, outside of reading, is to start surround yourself with people who are not afraid to challenge your ideas.

Like what you’re reading? Join thousands of others and get a free weekly update via email.

“Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day.” — Charlie Munger

Read more posts on Farnam Street on:
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LTStockPrices

Progress, changes in the index and more money in circulation.

Have a good weekend.  I highly recommend, HOW TO READ A BOOK by Adler.

You will become a better analyst/investor. Plus, I need everyone here to become a whole lot smarter the next time I pose a “brain crusher.”

Buffett Investment Lesson; Gold Capitulation Part 2

jurors

RISK: My grandfather invested his fortune in Russian bonds. This was before the Russian Revolution. At the time, he was told he couldn’t lose money. Because the bonds were pegged to gold. So there was no currency risk. And these were bonds of Russian railways, which were the most solid businesses in the world, and they were guaranteed by the Tsarist government. No currency risk. No default risk. No business risk. They were as close to risk-free as you can get. But when the Bolsheviks took over they seized the railways. They stopped paying the bonds. And they executed the Tsar and his family.”

It didn’t make any difference if the bonds were pegged to gold or not. They were worthless. It just reminds you of how things can go very bad in a way you don’t expect. Who would have imagined a communist revolution in Russia? (Could a Dictator take over the U.S.A.?)  www.acting-man.com

Buffett Image

The 1975 Buffett memo that saved WaPo’s pension

Found here:Warren-Buffett-Katharine-Graham-Letter on Pensions 1975

The letter alone is quite amazing. In it, Buffett identifies the pension problems that others would key in on only a decade or so later. But he also lays out perhaps for the first time — Buffett was 45 when he wrote it and years away from attaining the investment fame he has today — his philosophy behind what it takes to be a successful investor. His main pieces of advice: Think like an owner, look for a discount, and be patient. Full article: http://finance.fortune.cnn.com/2013/08/15/warren-buffett-katharine-graham-letter/?iid=EL

gold

Gold and Gold Stock Capitulation (GLD represents gold while GDX represents an index of major gold producers and GDXJ represents junior gold miners). Note the date of the low prices in End June/Early July. We last mentioned capitulation here: http://wp.me/p2OaYY-25W

GLD and GDX

Paulson’s Investors help form a bottom in Gold: http://www.acting-man.com/?p=25354#more-25354 (a suggested read)

Paulson & Co. – a Victim of Redemptions?

Today news hit that John Paulson has finally sold a big chunk of his position in GLD. It is not terribly surprising that this happened in the quarter when gold made its low. After Paulson sold his holdings in bank stocks, the group soared, with many of the stocks he had sold at the lows rising by 200% and more thereafter. However, this time it has probably less to do with his bad timing, but very likely more with the bad timing of investors in his funds. As the Bloomberg article mentions:

“Paulson & Co., the largest investor in the SPDR Gold Trust, the biggest exchange-traded product for the metal, pared its stake to 10.2 million shares in the three months ended June 30 from 21.8 million at the end of the first quarter, according to a government filing yesterday. The New York-based firm, which manages $18 billion, cut its ownership for the first time since 2011 “due to a reduced need for hedging,”according to an e-mailed response to questions.”

CSInvesting Editor: As mentioned before, I have been unable to find attractively priced franchises so in the past four months I have bought “quality” miners and related companies like RGLD, SLW, FNV, AUY, AEM, NGD, EGO, etc.  I place the word, QUALITY in quotes because those companies are not franchises and each struggles with the cyclical risks of their product–metals. So beware, I am biased to seeking out information that bolsters my bullish outlook like Commercial Hedgers having a low short position:

CoT-gold

and extremely negative speculative sentiment–a contrary signal.

Public-opinion-gold

And….

  • A very seasoned mining executive I’ve known for years (www.grandich.com)  sent me the following email, along with the latest World Gold Council report. He made a very keen observation is his email. Here it is:

“As an aside FYI, attached is the WGC’s first ½ 2013 report  – skip to page 14 and look at the highlight yellow I put in. Of ~2000 supply and demand tonnes  , ~578 tonnes are sold by ETF’s. If ETF’s sales were zero there would be a 29% supply shortfall. Total mine production is 1377 tonnes, ETF’s sold 42% of all mine production first ½ this year.    My math is that if the ETF’s get cleaned up and go to 0 sales, we are looking at quite a gold supply problem. Old fashioned thinking I know, but alas, I am just a simple guy.”

We have a very serious mine production shortfall that has been masked during the gold raids and sell-offs. I think it will get exposed going forward.

I need evidence against my thesis, so please send any negative information against owning precious metals miners and gold. I am reading:

Gold Bubble Book

Next week, I will post a valuation on Royal Gold (RGLD) so get a head start and visit the websites of Franco-Nevada (FNV), Silver Wheaton (SLW) and Sandstrom Gold (SAND) to learn about this business.

HAVE A GREAT WEEKEND!

Fifty Years on Wall Street; Tap Dancing to Work

300px-Henry_Clews

Henry Clews: Fifty Years in Wall Street (1907)

You may not love financial history as much as I do, but you will enjoy reading about the following themes:

  • The characteristics of winning and losing speculators
  • Wall Street during periods of war
  • How operators attempted to “corner” the markets for individual stocks
  • The causes and consequences of Wall Street panics
  • The influence of Wall Street on national politics
  • How individuals like Jay Gold, Daniel Drew, and Commodore Vanderbilt made their fortunes.

Book: Fifty Years in Wall Street (1859 to 1900) https://www.hightail.com/download/bWJxTG05R0Z1Yk5Yd3NUQw Thanks to a generous contributor.  The book is worth reading for a feel of Wall Street during the 19th Century and for learning that human nature does not change especially on Wall Street.  Add this to your Reminiscences of a Stock Operator from the last post http://wp.me/p2OaYY-26h. You now have reading material on Wall Street (1850 to 1930) from the speculators’ point of view.  Place this in your financial history section of your learning library!

Gilded Age: http://en.wikipedia.org/wiki/Gilded_Age and the Panic of 1857 

 The Life of Warren Buffett: Tap Dancing to Work

https://www.hightail.com/download/bWJxTG05R0ZrUm1LRmNUQw

Ok, I am burnt out on Buffett! And, I don’t think this is the best book on Buffett–better to spend the time on Snowball (soon to be posted), but I don’t censor, I leave it up to YOU, dear reader, to decide. See Amazon Review below:

A review: I was very much looking forward to this book – to be able to read a comprehensive and organized treatise on Buffett’s many philosophies and strategies. What a disappointment!

Be warned that the book is nothing but tidbits and random bits and pieces of articles written about him (and a few by him) over the last 46 years.

But don’t expect to learn anything you probably already didn’t know.
Any normal person wanting to learn about what really makes this man tick, and what his investing philosophies and strategies are, would do better to read Alice Schroeder’s comprehensive and impressive biography of Buffett – “The Snowball.”

I received the dropbox keys to a treasure chest of 80 books so I will parcel out over the next few weeks.  

If you find any books that helped you become a more insightful investor, then please let me know so I can share with the group. Thanks.

Case Study on Buffett’s Purchase of The Washington Post

The-Washington-Post-logo

Buffett began acquiring shares of the  Washington Post in early 1973, and by the end of the year held over 10 percent of the non-controlling “B” shares. After multiple meetings with Katherine Graham (the company’s Chairman and CEO), he joined the Post’s board in the fall of 1974.

According to Buffett’s 1984 speech The Superinvestors of Graham-and-Doddsville, in 1973, Mr. Market was offering to sell the Post for $80 million. Buffett also mentioned that you could have “…sold the (Post’s) assets to any one of ten buyers for not less than $400 million, probably appreciably more.” How did Buffett come to this value? What assumptions did he make when looking at the future of the company? Note: All numbers and details in this article are from the 1971 and 1972 annual reports and “Buffett: The Making of an American Capitalist” by Roger Lowenstein.

ANALYSIS

The purpose of this exercise is to reverse engineer Buffett’s analysis of the Washington Post Company—in other words, to construct a reasonable analysis given the facts as of 1973 that will lead us to the same conclusion Buffett arrived at.

READ more………..Washington_Post)Buffett Analysis (Thanks to a reader)

and 1972 Annual Report: Washington_Post)Buffett Analysis

Readings: So You Want To Be Like Buffett.

I am keeping this epic cover. A top in Central Banking confidence.

atlantic-april-2012-cover-ben-bernanke

Meanwhile……………..

hopeandchange

SpendingDeficit

Readings

So_You_Want_To_Be_The_Next_Warren_Buffett_Hows_Your_Writing_Mark_Sellers

The_Coffee_Can_Approach_Michael_Mauboussin

 

Have a Good Weekend.

Fiat Currencies vs. Gold; Paul Singer on Current Conditions; Readings

Fiat Currencies

Curiously, many people argue this would be a good time to abandon gold. We don’t think so – we rather think that faith in central banks will eventually crumble, and then it will be well and truly ‘game over’ for these perpetual bubble machines. As a friend of ours frequently remarks: at that point the question of how to price gold will be akin to asking what the last functioning parachute on an airplane that is going down should be worth. http://www.acting-man.com/?p=23082

Hedge fund “friend” upon hearing that I own gold, “If you were a lot smarter, we could call you stupid.”

Why Gold?

No, I am not actually doing what I posted here:http://wp.me/p2OaYY-1Vv. I own gold bullion and several precious metals miners, so yesterday when the stock market is up 1/2% while my portfolio drops 1%+, I take comfort when I review why I own gold:

“In a speech in Rome, ECB President Mario Draghi said the bank would monitor incoming data closely and be ready to cut rates further, including the deposit rate currently at zero.

For southern European countries, a euro above $1.30 would be too high for their economy. Among major central banks, the ECB has been the only bank that is not expanding its balance sheet. But It will likely consider such a step,” said Minori Uchida, chief FX analyst at the Bank of Tokyo-Mitsubishi UFJ.”

Meanwhile, sentiment in gold and precious metals miners is at historic (20 year) lows: http://thetsitrader.blogspot.com/2013/05/gold-and-silver-sentiment-reversal-is.html and Short Side of Long

While……..China and other Asian countries buy on dips.China Gold Imports

China_official_20gold holdings

I don’t buy the gold bugs premise that central banks will back their currencies with gold unless forced to by the market/the public. However, central bankers buying may indicate the lack of trust in their colleagues’ fiat currencies.  Also, gold “flowing” East represents a wealth transfer from West to East.

Print, print: http://www.zerohedge.com/news/2013-05-08/germany-under-pressure-create-money

In The Wilderness by Paul Singer

[T]he financial system (including the institutions themselves, products traded, and risks taken) has “gotten away from” the Fed’s ability to comprehend. The Fed is primarily responsible for that state of affairs, and it is out of its depth. Former Chairman Greenspan created — and reveled in — a cult of personality centered on himself, and in the process created a tremendous and growing moral hazard. By successive bailouts and purporting to understand (to a higher and higher level of expressed confidence) a quickly changing financial system of growing complexity and leverage, he cultivated an ever-increasing (but unjustified) faith in the Fed’s apparent ability to fine-tune the American (and, by extension, the world’s) economy. Ironically, this development was occurring at the very time that financial innovations and leverage were making the system more brittle and less safe. He extolled the virtues of derivatives and minimized the danger of leverage and risky securities and dot-com stocks, all while he should have been putting on the brakes. It was not just the disappearance of vast swaths of the American financial system into unregulated subsidiaries of financial institutions, nor was it just government policies that encouraged the creation and syndication of “no-documentation” mortgages to people who could not afford them. It was also the low interest rates from 2002 to 2005, the failure to see the expanding real estate bubble caused by an unprecedented increase in leverage and risk, and the general failure to understand the financial conditions of the world’s major institutions.

Under Chairman Bernanke, the combination of ZIRP and QE completed the passage of the Fed from sober protector of a fiat currency to ineffective collection of frantically-flailing, over-educated, posturing bureaucrats engaged in ever more-astounding experiments in monetary extremism.

If you look at the history of Fed policy from Greenspan to Bernanke,you see two broad and destructive paths quite clearly. One path is the cult of central banking, in which the central bank gradually acquired the mantle of all-knowing guru and maestro, capable of fine-tuning the global economy and financial system, despite their infinite complexity. On this path traveled arrogance, carelessness and a rigid and narrow orthodoxy substituting for an open-minded quest to understand exactly what the modern financial system actually is and how it really works. The second path is one of lower and lower discipline, less and less conservative stewardship of the precious confidence that is all that stands between fiat currency and monetary ruin.

Monetary debasement in its chronic form erodes people’s savings. In its acute and later stages, it can destroy the social cohesion of a society as wealth is stolen and/or created not by ideas, effort and leadership, but rather by the wild swings of asset prices engendered by the loss of any anchor to enduring value. In that phase, wealth and credit assets (debt) are confiscated or devalued by various means, including inflation and taxation, or by changes to laws relating to the rights of asset holders. Speculators win, savers are destroyed, and the ties that bind either fray or rip. We see no signs that our leaders possess the understanding, courage or discipline to avoid this.

It is true that the CEOs of the world’s major financial institutions lost their bearings and were mostly oblivious to their own risks in the years leading up to the crash. However, as the 2007 minutes make clear, the Fed was clueless about how vulnerable, interconnected and subject to contagion the system was. It is not the case that the Fed completely ignored risk; indeed, several Fed folks made “fig leaf” statements about the risks of the mortgage securitization markets, as well as other indications that they appreciated the possibility of multiple outcomes. But nobody at the Fed understood the big picture or had the courage to shift into emergency mode and make hard decisions. In the run-up to the crisis the Fed was a group of highly educated folks who lacked an understanding of modern finance. After convincing the nation for decades of their exquisite grasp of complexities and their wise stewardship of the financial system, they didn’t understand what was actually going on when it really counted.

Ultimately, of course, as the system was collapsing and on the verge of freezing up completely, the Fed shifted into the (more comfortable and much less difficult) role of emergency provider of liquidity and guarantees.

All this background presents an interesting framework in which to think about what the Fed is doing now. QE is a very high-risk policy, seemingly devoid of immediate negative consequences but ripe with real chances of causing severe inflation, sharp drops in stock and bond prices, the collapse of financial institutions and/or abrupt changes in currency rates and economic conditions at some point in the unpredictable future. However, the lack of large increases in consumer price inflation so far, plus the demonstrable “benefits” of rising stock and bond markets, have reinforced the merits of money-printing, which is now in full swing across the world. In the absence of meaningful reforms to tax, labor, regulatory, trade, educational and other policies that could generate sustainable growth, “money-printing growth” is unsound.We believe that the global central bankers, led by the Fed as “thought leader,” have no idea how much pain the world’s economy may endure when they begin the still-undetermined and never-before attempted process of ending this gigantic experimental policy. If they follow the paths of the worst central banks in history, they will adopt the “tiger by the tail” approach (keep printing even as inflation accelerates) and ultimately destroy the value of money and savings while uprooting the basic stability of their societies. Read the 2007 Fed minutes and you will understand how disquieting is the possibility of such outcomes and how prosaic and limited are the people in whom we have all put our trust regarding the management of the financial system and the plumbing of the world’s economy.

Printing money by the trillions of dollars has had the predictable effect of raising the prices of stocks and bonds and thus reducing the cost of servicing government debt. It also has produced second-order effects, such as inflating the prices of commodities, art and other high-end assets purchased by financiers and investors. But it is like an addictive drug, and we have a hard time imagining the slowing or stopping of QE without large adverse impacts on the prices of stocks and bonds and the performance of the economy. If the economy does not shift into sustainable high-growth mode as a result of QE, then the exit from QE is somewhere on the continuum between problematic and impossible.

Central banks facing high inflation and/or sluggish growth after sustained money-printing frequently are paralyzed by the enormity of their mistake, or they are deranged by the thought that the difficult and complicated conditions in a more advanced stage of a period of monetary debasement are due to just not printing enough. At some stage, central banks inevitably realize, regardless of whether they admit the catastrophic nature of their own failings, that the cessation of money-printing will cause an instant depression. Even though at that point the cessation of money-printing may be the only action capable of saving society, that becomes a secondary consideration compared to the desire to avoid immediate pain and blame. The world’s central banks are in very deep with QE at present, and the risks continue to build with every new purchase of stocks and bonds with newly-printed money.

* * *

[And, as an added bonus, here are Singer’s views on gold:]

There are many current theories as to why the price of gold had been drifting down and then collapsed in mid-April. We are trying to sort out various possible explanations, but we urge investors to be cautious in their thinking about what circumstances would likely cause gold to rise or fall sharply. The correlations with other assets in various scenarios (risk on or off, economic normalization, inflation, the rise and fall of interest rates, euro collapse) may shift abruptly as the macro picture evolves. Many people think that if stock markets continue rising, and/or if the U.S. and Europe restore normal levels of growth and employment, then the rationale for owning gold is weakened or destroyed. This perception may be correct, and it is certainly a topic that is currently much discussed, but ultimately another set of considerations is likely to dominate.

The world is on a seemingly one-way trip to monetary debasement as the catchall economic policy, and there is only one store of value and medium of exchange that has stood the test of time as “real money”: gold. We expect this dynamic to assert itself in a large way at some point. In the meantime, it is quite frustrating to watch the price of gold fall as the conditions that should cause it to appreciate seem more and more prevalent. Gold may not exactly be a “safe haven” in the sense of an asset whose value is precisely known and stable. But it surely is an asset that, in a particular set of circumstances, becomes a unique and irreplaceable “must-have.” In those circumstances (loss of confidence in governments and paper money), there are no substitutes, and the price of gold may reflect that characteristic at some point.

Disprove Your Opinions on Gold

Gold BubblePure nonsense, April 24, 2012

By Bobnoxy

This review is from: Gold Bubble: Profiting From Gold’s Impending Collapse (Hardcover)

This book will no doubt go into the proverbial dustbin of history along with Dow 36,000. Ask yourself some honest questions and then compare your answers to this book’s entire premise.

Is gold in a bubble? Well, what do bubbles look like? Luckily, we have two recent examples, the housing bubble, and the tech stock bubble in the late 90’s. What did those look like?

To me, they looked like everyone was getting rich in techs stocks and flipping houses. Regular people were quitting their jobs and day trading or flipping houses full time. The average guy, the little guy, sometimes referred to as the ”dumb money” was making an easy fortune.

Now, how many of your friends own any gold and talk about it with you? How much do you own? The writer points to all the publicity around gold, like those ads telling people to sell their gold. And ever since gold hit $1,000, people were doing just that, selling their gold.

In a bubble, those people would be loading up, but they’re selling! The world’s central banks, the smartest people in the world when it comes to money, are the big buyers. This would be the first bubble in history that the dumb money was selling into and the smartest money on the planet was buying. Do you really think that the people with the least knowledge about money are getting this right?

It would also be the first bubble to happen with almost no participation from the general public. This could be the weakest analytical book written this year. Just because the price of something is up does not mean it’s in a bubble.

If you look at the average selling price of gold in the year it peaked for the last bull cycle, 1980, or $660 an ounce, and look at today’s price, the average annual gain for that 32 years is about 3%. If stocks had risen by 3% annually for that long, would anyone be calling it a bubble?

Then look at our trillion dollar deficits and the growth in the Fed’s balance sheet, total government debt of $18.5 trillion when you include state and local debt that as taxpayers, we’re all on the hook for, and there’s your bubble, and the best reason to defend yourself by owning gold.

Readings:

Thanks to a reader’s contribution: Here is a good article attached on bureaucracy and leading to misguided incentives. http://www.nytimes.com/2013/05/12/magazine/the-food-truck-business-stinks.html?ref=magazine&pagewanted=print

Another reader:

I came across your website via your interview with Classic Value Investors. I like the way you try to help people learn the craft. Value investing is in principle not that difficult, as long as you have a good teacher. So well done!

On my own value investing blog (http://www.valuespreadsheet.com/value-investing-blog). I try to share my knowledge on the subject as well, but not per sé with case studies like you do. However, your approach is very informative for readers, so maybe I should try that some more.

I’ve also written a free eBook which explains three valuation models in simple words. Feel free to add it to your value investing resources if you like it:

http://www.scribd.com/doc/137908826/How-to-Value-Stocks-By-Value-Spreadsheet

Kind regards, Nick Kraakman, www.valuespreadsheet.com

—-

Thanks for the above contributions.

 

Internet Boom and Bust; Herbalife and Bill Ackman

nasdaq1986s

Here is the Perhsing Square website on Herbalife. Sign up and learn:

Pershing has their HLF deck up on the website: http://factsaboutherbalife.com/

Verdict: This will get ugly but my money would be on Ackman since there is no competitive advantage, so I would place the value no more than tangible book value at best with no more than a 90 second look at the financials.

The purpose of this post is also to study a Ponzi scheme. The response of the company to Ackman’s research leads me to say this company’s days are numbered.

BOOM and BUST

Could Austrian Business Cycle Theory Dotcom Boom and Bust have helped you as an investor? Buffett’s presentation on the Dotcom Bubble in early 1999 (See page 64) A Study of Market History through Graham Babson Buffett and Others. Note how the market went into a speculative frenzy, rising more than 50% AFTER Buffett’s speech. Human action can’t be predicted like a physics experiment.

An excellent book that predicted the bust was the The Internet Bubble: Inside the overvalue World of High Tech Stocks–and What you Need to Know To Avoid The Coming Shakeout by Anthony Perkins and Michael Perkins (1999 and 2001 editions).

Burning up (cash) http://www.fool.com/news/foth/2002/foth020830.htm

A student’s overview: David Carr – THE TECHNOLOGY STOCK BUBBLE

Ackan presents on Herbalife: http://www.reuters.com/article/2012/12/20/us-ackman-herbalife-idUSBRE8BI1MZ20121220. He says that he will be setting up a website with all his research on Herbalife. If anyone FINDS IT, please send me the link to post. This could become a good case study on multi-level marketing.

Dec. 21 2012 Update: Thanks to a reader: www.businessinsider.com/bill-ackmans-herbalife-presentation-2012-12

See presentation here:Who-wants-to-be-a-Millionaire

See this article:http://seekingalpha.com/article/918831-an-investor-s-guide-to-identifying-pyramid-schemes

Motivate thyself: Anthony Robbins http://www.youtube.com/watch?v=Cpc-t-Uwv1I&feature=share&list=PL70DEC2B0568B5469.  Yes, he could be a huckster, but he is a great public speaker. Focus on HOW he presents.

 

Small Cap Analysis; Buffett on Taxes and Rebuttal by Norquist

Presentation on Brick

http://greenbackd.com/2012/11/26/the-brick-ltd-up-118-percent-on-guy-gottfrieds-recommendation/

Gottfried_TheBrick_VICNY2011 (3)    (Powerpoint)

Tap dancing to work (Buffett Interview on Charlie Rose) http://www.charlierose.com/view/interview/12672

Buffett Opines on Raising Taxes (Comments in Italics)

When taxes change, would-be investors will certainly change their decisions about where to direct capital, even “though the companies’ operating economics will not have changed adversely at all.” Buffett saw this clearly in 1986, with respect to Berkshire’s own investment decisions; it’s hard to believe that Buffett no longer believes that today, with respect to private investors.

November 25, 2012

A Minimum Tax for the Wealthy By WARREN E. BUFFETT

SUPPOSE that an investor you admire and trust comes to you with an investment idea. “This is a good one,” he says enthusiastically. “I’m in it, and I think you should be, too.”

Would your reply possibly be this? “Well, it all depends on what my tax rate will be on the gain you’re saying we’re going to make. If the taxes are too high, I would rather leave the money in my savings account, earning a quarter of 1 percent.” Only in Grover Norquist’s imagination does such a response exist.

It’s a catchy opener, attracting headlines and guffaws from the expected quarters. But I’m struck by his opener because I can think of at least one real-world example in which a rich investor nearly spiked a deal due to taxes: Warren Buffett himself, as recounted in Alice Schroeder’s terrific biography, The Snowball (pages 230-232).

Early in his career, Buffett invested heavily—almost one third of his early fund’s capital—in Sanborn Map, a company that mapped utility lines and such. But he soon grew frustrated with the company’s leadership, which “operated more like a club than a business,” and which refused to return greater dividends to investors. So Buffett amassed more and more stock, and with control of the company finally in hand he pressed the board of directors to split the company in two (one for the mapping business, and one to hold the company’s other outsized investments).

Finally, the board capitulated. But with victory finally at hand, Buffett nearly scuttled the deal because of … taxes. As Schroeder recounts, quoting Buffett, one director proposed that the company just cleanly break the company, despite the tax consequences—”let’s just swallow the tax,” he suggested.

To which Buffett replied (as he recounted to Schroeder): And I said, ‘Wait a minute. Let’s — “Let’s” is a contraction. It means “let us.” But who is this us?  If everyone around the table wants to do it per capita, that’s fine, but if you want to do it in a ratio of shares owned, and you get ten shares’ worth of tax and I get twenty-four thousand shares’ worth, forget it.’
Buffett was willing to walk away from a deal because the taxes would have taken too much of a bite out of it.

Between 1951 and 1954, when the capital gains rate was 25 percent and marginal rates on dividends reached 91 percent in extreme cases, I sold securities and did pretty well. In the years from 1956 to 1969, the top marginal rate fell modestly, but was still a lofty 70 percent — and the tax rate on capital gains inched up to 27.5 percent. I was managing funds for investors then. Never did anyone mention taxes as a reason to forgo an investment opportunity that I offered.

Under those burdensome rates, moreover, both employment and the gross domestic product (a measure of the nation’s economic output) increased at a rapid clip. The middle class and the rich alike gained ground.

So let’s forget about the rich and ultrarich going on strike and stuffing their ample funds under their mattresses if — gasp — capital gains rates and ordinary income rates are increased. The ultrarich, including me, will forever pursue investment opportunities.

That’s not the only time that taxes played a major role on Buffett’s decisions, as recounted by Schroeder. Later in the book (pp. 533-534), she recounts how Buffett chose to structure his investments under Berkshire Hathaway’s corporate umbrella, rather than as part of his hedge fund’s general portfolio, precisely because of the tax advantages.

In fact, as he explained in his 1986 letter to investors, changes in the 1986 tax reform act posed a specific threat to certain investment decisions:

If Berkshire, for example, were to be liquidated – which it most certainly won’t be — shareholders would, under the new law, receive far less from the sales of our properties than they would have if the properties  had been sold in the past, assuming identical prices in each sale. Though this outcome is theoretical in our case, the change in the law will very materially affect many companies. Therefore, it also affects our evaluations of prospective investments.  Take, for example, producing oil and gas businesses, selected media companies, real estate companies, etc. that might wish to sell out. The values that their shareholders can realize are likely to be significantly reduced simply because the General Utilities Doctrine has been repealed – though the companies’ operating economics will not have changed adversely at all.  My impression is that this important change in the law has not yet been fully comprehended by either investors or managers.

And, wow, do we have plenty to invest. The Forbes 400, the wealthiest individuals in America, hit a new group record for wealth this year: $1.7 trillion. That’s more than five times the $300 billion total in 1992. In recent years, my gang has been leaving the middle class in the dust.

A huge tail wind from tax cuts has pushed us along. In 1992, the tax paid by the 400 highest incomes in the United States (a different universe from the Forbes list) averaged 26.4 percent of adjusted gross income. In 2009, the most recent year reported, the rate was 19.9 percent. It’s nice to have friends in high places.

The group’s average income in 2009 was $202 million — which works out to a “wage” of $97,000 per hour, based on a 40-hour workweek. (I’m assuming they’re paid during lunch hours.) Yet more than a quarter of these ultrawealthy paid less than 15 percent of their take in combined federal income and payroll taxes. Half of this crew paid less than 20 percent. And — brace yourself — a few actually paid nothing.

This outrage points to the necessity for more than a simple revision in upper-end tax rates, though that’s the place to start. I support President Obama’s proposal to eliminate the Bush tax cuts for high-income taxpayers. However, I prefer a cutoff point somewhat above $250,000 — maybe $500,000 or so.

Additionally, we need Congress, right now, to enact a minimum tax on high incomes. I would suggest 30 percent of taxable income between $1 million and $10 million, and 35 percent on amounts above that. A plain and simple rule like that will block the efforts of lobbyists, lawyers and contribution-hungry legislators to keep the ultrarich paying rates well below those incurred by people with income just a tiny fraction of ours. Only a minimum tax on very high incomes will prevent the stated tax rate from being eviscerated by these warriors for the wealthy.

Above all, we should not postpone these changes in the name of “reforming” the tax code. True, changes are badly needed. We need to get rid of arrangements like “carried interest” that enable income from labor to be magically converted into capital gains. And it’s sickening that a Cayman Islands mail drop can be central to tax maneuvering by wealthy individuals and corporations.

But the reform of such complexities should not promote delay in our correcting simple and expensive inequities. We can’t let those who want to protect the privileged get away with insisting that we do nothing until we can do everything.

Our government’s goal should be to bring in revenues of 18.5 percent of G.D.P. and spend about 21 percent of G.D.P. — levels that have been attained over extended periods in the past and can clearly be reached again. As the math makes clear, this won’t stem our budget deficits; in fact, it will continue them. But assuming even conservative projections about inflation and economic growth, this ratio of revenue to spending will keep America’s debt stable in relation to the country’s economic output.

In the last fiscal year, we were far away from this fiscal balance — bringing in 15.5 percent of G.D.P. in revenue and spending 22.4 percent. Correcting our course will require major concessions by both Republicans and Democrats.

All of America is waiting for Congress to offer a realistic and concrete plan for getting back to this fiscally sound path. Nothing less is acceptable.

In the meantime, maybe you’ll run into someone with a terrific investment idea, who won’t go forward with it because of the tax he would owe when it succeeds. Send him my way. Let me unburden him.

Warren E. Buffett is the chairman and chief executive of Berkshire Hathaway.

Norquist hits back against Buffett op-ed, calls argument ‘silly’

By Daniel Strauss – 11/26/12 06:12 PM ET

Americans for Tax Reform President Grover Norquist responded to an op-ed by billionaire Warren Buffett Monday, saying Buffett’s argument was “silly.”

On Monday The New York Times published an op-ed by Buffett criticizing Norquist’s anti-tax pledge and urging Congress to pass legislation rolling back the Bush-era tax rates for incomes above $500,000 a year. Later on Monday Norquist appeared on Fox News and called Buffett’s argument silly, and said Buffett got rich by “gaming the system.”

“Warren Buffett has made a lot of money, some of it off of gaming the political system. He invests in insurance companies and then lobbies to raise the death tax, which drives people to buy insurance. You can get rich playing that game but it’s all corrupt,” Norquist said. “It’s not investing; it’s playing crony politics and economics. That’s a shame. He’s done the same thing with some green investing. Shame on him for gaming the system and giving money to politicians who write rules that make your assets go up.

“The real economy, the real economy, if he thinks that the government can take a dollar and then you go to an investor who doesn’t have that dollar and it doesn’t affect investment, I’m sorry that’s just silly unless he plans on going to Obama and getting money from a stimulus package and he considers that investment. When the government takes a dollar away from the American people or a trillion dollars, that’s a trillion dollars not available to be saved and invested. I’m sorry if Buffett can’t see that but that’s kind of silly on his part.”

The back-and-forth between Norquist and Buffett comes as legislators seek to come to an agreement on a deficit-reduction package to avoid the “fiscal cliff” of spending cuts and tax increases set to hit next year.

A number of Republicans have indicated that they could disregard supporting the Americans for Tax Reform pledge in order to reach a deal.

Buffett, an outspoken supporter of President Obama, published an op-ed in the Times in 2011 arguing that the tax rates on the wealthiest Americans should be higher. The Obama administration subsequently began pushing for a “Buffett Rule” that would raise the marginal tax rate for some of the wealthiest Americans. Obama has since called for increasing the tax rate on incomes above $250,000 a year. The Buffett Rule also introduces a base 30 percent tax rate for incomes between $1 million and $10 million and a 35 percent rate for incomes over $10 million.

Source: http://thehill.com/blogs/blog-briefing-room/news/269435-norquist-calls-buffet-argument-silly-

WHAT DO YOU, THE READERS, THINK?

 

 

 

Investment Presentation (JACK) and Readings

Don’t Confuse Growth With Sustainable Competitive Advantage

“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.”

–Warren Buffett, Fortune magazine, 11/22/99

Warren_Buffett_Squawk_Box_Transcript-10-24-12

Watch Ryan Fusaro, Value Investing Challenge winner present his top idea: Jack In the Box

Ryan Fusaro, winner of the Value Investing Challenge, shared his analysis of Jack in the Box and how the company’s refranchising efforts will unlock enormous value at the 8th Annual New York Value Investing Congress. Click here to watch a video of his presentation! http://bit.ly/PoQQLy

Long Jack in the Box (JACK)

Fusaro won and pitched Jack in the Box (JACK) in his talk entitled ‘Thinking Outside the Box.” He started with some history that JACK has refranchised from 25% in 2005 to 75% today.

– Incomplete financial reporting
– Potential margin improvement
– Great brands
– Cost structure hasn’t caught up with franchise model

He touched on how JACK owns Jack in the Box but also owns Qdoba, which has typically been too small to really matter but is now worth $580m by itself and value could be unlocked with a spin-off. Think McDonald’s (MCD) when it spun-off Chipotle (CMG). JACK also owns the real estate.

Fusaro says there’s a growth business embedded in a value business and also touched on unlocking real estate value.

Read more: http://www.marketfolly.com/2012/10/ryan-fusaros-presentation-on-jack-in.html#ixzz2AQm8GdUq

Presentation:Fusaro-VIC-Presentation_Jack in the Box_JACK

Let me know if you think the above was worthy of a prize?

Free-Market Money?

http://www.nytimes.com/2012/10/25/us/liberty-dollar-creator-awaits-his-fate-behind-bars.html?pagewanted=all&_r=0&pagewanted=print

Dinner with Pabrai? Who will beat my bid?

Mohnish Pabrai is auctioning off two items: lunch with himself (plus a stock tip) and a life-size bronze bust of Charlie Munger. The proceeds of both will go to the Dakshana Foundation, which he established to help academically promising poor kids in India:

 

Do you have trading greatness? http://www.marketpsych.com/tradingedge.php

Your personality: http://www.marketpsych.com/personality_test.php

Youth has gone Austrian: http://mises.org/daily/6147/The-Future-of-the-Austrian-School

 

 

Have a good weekend.

 

 

Valuation: Valuing Growth and the Petersburg Paradox

Growth and value investing are joined at the hip. –Warren Buffett

The one and absolute truth I have learned about investing–and it is the only one–is that long-range success comes not from any simple rule or rules that can be followed by everyone but only from the most rigorous pursuit of disciplines designed to neutralize the emotional pressures that inevitably descent from time to time upon anyone who is responsible for investing other people’s money.

Those disciplines must be self-evolved because we all have different strengths and weaknesses. the things they have in common are (1) defining precisely what we are trying to do; (2) clearly understanding the reasons for the strategy; (3) recognizing in advance what problems will sooner or later accompany the strategy–for there will always be such problems’ and (4) developing the strength to “stay the course” given during troubled times. Successful investing requires constant inquisitiveness about the new and everlasting, open-minded re-examination of the old. The latter process is more difficult than the former. Not many of us are willing and able to accept the tough disciplines that are involved and not many achieve long-term investment success.  –Robert R. Barker, an investor who compounded capital at about a 25% annual rate during the 1950s and 1960s. (1979 Speech)

A Journey to Learn Valuation

I will first focus on how to value growth stocks. There is no promise that we will discover an answer, but we will study the investing greats and their original comments to find our way. Many “great” or famous investors have floundered on the shoals of growth investing. Like Bill Miller: http://executivesuite.blogs.nytimes.com/2008/09/08/bill-millers-really-bad-bet/. 

Humbly, we begin by studying the problem of using high and PERPETUAL growth rates when valuing a business.  When g is = to r, the result is an absurdity.

 The Dividend Discount Model

Where:

D1 (Estimate of next year’s dividend) = Current annual dividend * (1 + g)
r (Required Rate of Return for the Stock) = Real Risk Free Rate + (Market Return – Real Risk Free Rate) * Beta of Stock
Real Risk Free Rate = 52-Week T-Bill Yield**
Market Return = Estimate for the stock market’s return in the next year
g (Dividend Growth Rate) = Estimate for the stock’s dividend growth rate (you may calculate g by using the growth of the dividend in the past)

** 52-Week T-Bill Yield – You can find the yield by going to the U.S. Treasury Direct website, selecting the most recent year under auction date > 52-week bills > PDF of the latest auction results.

The Petersburg Complex

This paper by David Durand is a famous article that Ben Graham refers often to in his writings. Growth Stocks and the Petersburg Paradox  If you read only one article from this post, read that. To emphasize the importance of the above article, here is where others have analyzed the article St Petersburg Paradox and Tech Stocks 2000 and St Petersburg Paradox.

Then articles discussing how investors fool themselves: The_Importance_of_Expectations_–_August_2012 and Bubbles and Growth

Growth what is it good for and ROIC

The Dangers of Applying Discounted Cash Flow Models

Ben_Graham_and_the_Growth_Investor_Bryant_College_041008

Dangers of DCF_Mortier and CommonErrors

………….NEXT I will post Graham’s discussion on valuing growth stocks.

 

Just Show ME the Money

For those readers who lack the patience to study theory and who say, http://youtu.be/mBS0OWGUidc?t=37s There are other blogs for you to read: http://www.oldschoolvalue.com/blog/

52 Techniques for Accounting Fraud _ Jae Jun

One of my favorite blogs: www.greenbackd.com